Many well-heeled investors pouring money into real estate bonds to get a higher return from a secured investment have been taken aback by the first default in a property debenture since the turbulent days of 2008-09.

A month-and-a-half ago Century Real Estate, an influential Bangalore realtor, failed to pay the interest rate on time. While the company is trying to sort out the issue with investors, the development has gone down in the property market as a signal of cash-flow problems many developers are grappling with amid a slowdown in sales.

In the past three years, close to Rs 12,000 crore have been raised by developers from Mumbai, Delhi and Bangalore through private placement to high net-worth individual ( HNI) investors, corporate treasuries and finance companies.

As banks turned selective, primary market issuance to these investors emerged as a quick fundraising option. The Century debentures were also placed with investors like Kotak MahindraBSE 0.90 % Prime (a non-banking finance company), some HNIs and corporate investors.

Post default, IL&FS, the debenture trustee for the issuance, has taken legal action as per the trust deed to salvage the money. Each debenture had a face value of Rs 1 crore.

"IL&FS has kept investors informed about all its actions. It has taken legal action for enforcement of security to recover all investors' money," a Kotak Group spokesman said, responding to an email query from ET.

"If sales do not pick up, we won't be surprised if more real estate companies find it difficult to pay interest and redemption money on time... In many cases builders have been borrowing fresh money to repay old debts. Under such circumstances, cash-flow mismatches are very likely if home buyers wait and watch and new debt finance is not easily available," said a senior official of a large financial institution.

According to him, some of the banks are refinancing each others' loans before there is a default. "One of the reasons why builders prefer loans to debentures is because banks can evergreen loans but the market always gets a whiff of adefault in debentures... But not too many banks are raising their exposure to builders," said a broker.

The Century debenture issue is secured against multiple land parcels in Bangalore - the market value of which is estimated at approximately Rs 600 crore - resulting in a security cover which is multiple times the outstanding debt.

"While investors may get back their money after some time, credit rating agencies may have to take a relook at the company," said a source. An email query to Century Real Estate MD Ravindra Pai remained unanswered till the time of going to press.

In 2009, one of the country's developers had to restructure the terms of its debentures placed with mutual funds to tide over cash crunch and avoid, albeit temporarily, the defaulter tag. The company had found itself in a desperate state after it was forced to withdraw its maiden equity issue.

But fund houses, fearing that a redemption default would hit the net asset value of MF schemes, co-operated to rejig the asset.

"The situation now is certainly better than what it was in 2009 but the firms continue to be leveraged. With fewer transactions happening, particularly in Mumbai, not all builders are in a position to hold on to the prices they are currently quoting for ready or near-ready properties. There is also some oversupply in markets like Bangalore," said an industry source.